price control

• What is the primary purpose of a minimum price or price floor?

  Discourage overconsumption
• A minimum price is set above the equilibrium price
• A minimum price reduces the quantity consumed in the market.
• What is the socially optimum level of output achieved after imposing a minimum price?

  Q star
• A minimum price is intended to internalize externalities in the market.
• Price inelastic demand reduces the effectiveness of a minimum price.
• What is the term used to describe a policy that disproportionately affects the poor negatively?

  Regressive
• A minimum price may widen income inequality in society.
• Effects of a minimum price on alcoholic drinks market

  1️⃣ Overconsumption at equilibrium

  2️⃣ Minimum price imposed above equilibrium

  3️⃣ Demand contracts

  4️⃣ Output reduces to Q star

  5️⃣ Allocative efficiency achieved
• Black markets can emerge due to minimum prices.
• What type of government failure is associated with minimum prices and black market activity?

  Tax revenue loss
• If a minimum price is set too high, firms may suffer and leave the country.
• Producers always lose revenue when a minimum price is imposed.

  False
• What happens if a minimum price is set too low?

  Market failure persists
• Maximum prices are also known as price ceilings.
• Maximum prices are set below the equilibrium price.
• What is the primary goal of a maximum price?

  Promote equity
• Rent control is a common example of a maximum price.
• A maximum price encourages more consumption of essential goods.
• What is created in the market when a maximum price is imposed below the equilibrium price?

  Shortage
• A shortage caused by a maximum price indicates excess demand.
• Effects of a maximum price on rented accommodation

  1️⃣ Excess demand for housing

  2️⃣ Government sets a maximum price

  3️⃣ Demand extends, supply contracts

  4️⃣ Shortage is created

  5️⃣ Black markets emerge
• Black markets are a likely consequence of maximum prices.
• What type of government failure is associated with maximum prices and black markets?

  Market inefficiency
• Maximum prices can lead to landlords offering lower-quality accommodation.
• Enforcement of maximum prices can be costly for governments.
• What happens if a maximum price is set too high?

  Desired effects are not achieved
• Subsidizing private landlords is a costly way to address shortages caused by maximum prices.
• Government intervention to address market failures always results in allocative efficiency.

  False